2.7

We described the original emergency facility operations of the Fed as "monetary pornography." When QE was triggered, we compared the slide to switching from Playboy to Hustler. Once you enter the bizzaro-world of a Central Bank boosting inflation you have to realize that "success" will be measured by the CBs loss of credibility. The Fed bashers fail to recognize the changed metric. Since the August policy adjustment, the currency has fallen and inflation measures have moved up to roughly 2.7%.

It is this increase, and the now open expectation by market participants of further increase that the Fed will be addressing in the statement and press conference Wednesday. We are at the upper band of what most would say is tolerable and higher than other CBs deem acceptable. Bernanke, Yellen and Dudley form a triumvirate at the top of the Fed that believe these price increases are "transitory."

Here's how monetary pornography makes a Central Banker go blind. If BYandD are right, then the policy doesn't work. If markets (and corporate CEOs) are right, then the Fed will have to restrain the expectations they worked so hard to elevate. The concept of the Fed "in neutrality" has been lost right when this important concept of equilibrium is needed most. The continuation of rolling purchases to hold the balance sheet stable (or face a soft "tightening") ended a neutral Fed. The Chairman and the statement are thus the last "tools" (pun) in the toolbox to lay out the forecast and hope the markets buy in. Here is how I wish it would sound, " The policies of extreme monetary accommodation have boosted economic activity and both recognized and expected inflation readings. The Board continues to believe our gambit, ultimately, will not work."